Brussels, 08/03/2012 (Agence Europe) - The European Central Bank is sure that the two long-term refinancing operations have been an “unquestionable success” in calming the markets and easing the sovereign debt crisis. “The environment has improved enormously”, explained the EIB president, Mario Draghi, on Thursday 8 March as he left a meeting of the ECB Governing Council that he had been chairing. He said the markets have reopened and the interbank markets are slightly better. In addition, there are many signs of confidence in the euro, with cash flowing into investment funds and pensions again.
In December 2011 and February 2012, two long-term refinancing operations allowed European banks to borrow money cheaply from the ECB over three years. The first operation enabled 520 banks to borrow nearly €500 billion (see EUROPE 10521), and the second enabled more than 800 banks to borrow €530bn. Before deciding whether another such operation is needed, the ECB will analyse the impact of the first two. Draghi said that the second deal had been joined by many small banks, more than 400 of them German banks. Not all the cash would be lent on to small businesses, but the loans make funding for small businesses more accessible than it was before, he said. The first operation had prevented a number of banks from going bankrupt, while the second had allowed banks to buy up sovereign debt and lend on to the real economy.
The former governor of the Bank of Italy said that the ball was now in the court of banks and governments - governments to launch structural reforms, and banks to clear debt and back economic recovery. The ECB decided without debate on Thursday to leave interest rates unchanged (1% for the marginal lending facility), but revised down its growth forecasts for this year and next. Expecting a gradual upturn in the economy in 2012, it says that eurozone GDP growth/stagnation will be between
“-0.5% and 0.3%” this year, and between “0% and 2.3%” next year. It expects inflation to remain above 2% in 2012 as a result of fuel prices, but to fall to below 2% in early 2013. The ECB says inflation in the eurozone will be between 2.0% and 2.7% in 2012 and between 0.9% and 2.2% in 2013.
Draghi brushed aside arguments that the two recent ECB loans to banks increase the risks to the ECB and will have a negative impact on exchange rates with emerging economies. Brazil, for example, is worried about an exchange rate war as a result of the ECB's huge cash injection into European banks. The ECB president said that the decisions on the two bank refinancing operations had been taken unanimously by the Governing Council in response to questions about a potential isolation of the Bundesbank.
Budget pact. Draghi is sure that the 25-member state budget pact signed at the European Spring summit will be applied and will work as intended. He said that the European leaders were clear that economic and monetary union can only work if countries give up some of their national sovereignty over budget matters and there cannot be one country that pays for the others. This, he said, is the aim of the budget pact. As for the size of the European bailout funds, he said people need to have confidence in the fact that Europeans will do the right thing, even if slowly. Later this month, eurozone finance ministers will be examining whether to merge the €500 billion European Stability Mechanism with the remaining €250bn in the European Financial Stability Facility. (MB/transl.fl)